Evaluating a Firm's External Environment - Illinois State University

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M02_BARN4586_03_SE_C02.qxd 7/1/09 7:34 AM Page 55 Chapter 2: Evaluating a Firm’s External Environment 55 It began with a 5,000-word e-mail sent by Steve Balmer, CEO of Microsoft, to all 57,000 employees. Whereas previous e-mails from Microsoft founder Bill Gates—including one in 1995 calling on the firm to learn how to “ride the wave of the Internet”—inspired the firm to move on to conquer more technological challenges, Balmer’s e-mail focused on Microsoft’s current state and called on the firm to become more focused and efficient. Balmer also announced that Microsoft would cut its costs by $1 billion during the next fiscal year. One observer described it as the kind of e-mail you would expect to read at Procter & Gamble, not at Microsoft. Then the other shoe dropped. In a surprise move, Balmer announced that Microsoft would distribute a large portion of its $56 billion cash reserve in the form of a special dividend to stockholders. In what is believed to be the largest such cash dispersion ever, Microsoft distributed $32 billion to its stockholders and used an additional $30 billion to buy back stock. Bill Gates received a $3.2 billion cash dividend. These changes meant that Microsoft’s capital structure was more similar to, say, Procter & Gamble’s than to an entrepreneurial, high-flying software company. What happened at Microsoft? Did Microsoft’s management conclude that the PC software industry was no longer emerging, but had matured to the point that Microsoft Strategy in the Emerging Enterprise Microsoft Grows Up would have to alter some of its traditional strategies? Most observers believe that Balmer’s e-mail, and the decision to reduce its cash reserves, signaled that Microsoft had come to this conclusion. In fact, although most of Microsoft’s core businesses—its Windows operating systems, its PC applications software, and its server software—are still growing at the rate of about $3 billion a year, if they were growing at historical rates these businesses would be generating $7 billion in new revenues each year. Moreover, Microsoft’s new businesses— video games, Internet services, business software, and software for phones and handheld computers—are adding less than $1 billion in new revenues each year. That is, growth in Microsoft’s new businesses is not offsetting slower growth in its traditional businesses. Other indicators of the growing maturity of the PC software industry, and Microsoft’s strategic changes, also exist. For example, during 2003 and 2004, Microsoft resolved most of the outstanding antitrust litigation it was facing, abandoned its employee stock option plan in favor of a stock-based compensation scheme popular with slower-growth firms, improved its systems for receiving and acting on feedback from customers, and improved the quality of its relationships with some of its major rivals, including Sun Microsystems, Inc. These are all the actions of a firm that recognizes that the rapid growth opportunities that existed in the software industry when Microsoft was a new company do not exist anymore. At this point, Microsoft has to choose whether it is going to jump-start its growth through a series of large acquisitions or accept the lower growth rates in its core markets. As described in the opening case for Chapter 10, it made a significant, but ultimately unsuccessful, effort to acquire Yahoo in an attempt to jump-start its growth in online services, a strong indicator that Microsoft, while acknowledging slower growth in its core, has not completely abandoned the idea of growing quickly in some parts of its business. Sources: J. Greene (2004). “Microsoft’s midlife crisis.” BusinessWeek, April 19, 2004, pp. 88 +; R. Guth and S. Thurm (2004). “Microsoft to dole out its cash hoard.” The Wall Street Journal, Wednesday, July 21, 2004, pp. A1 +; S. Hamm (2004). “Microsoft’s worst enemy: Success.” BusinessWeek, July 19, 2004, p. 33; www.microsoft.com/billgates/speeches/2006/00- 15transition.asp. This emphasis on service has become very important in a wide variety of industries. For example, in the convenience food industry, one of the major reasons for slower growth in the fast-food segment has been growth in the so-called “casual dining” segment. This segment includes restaurants such as Chili’s and Applebee’s. The food sold at fast-food restaurants and casual dining restaurants
M02_BARN4586_03_SE_C02.qxd 7/1/09 7:34 AM Page 56 56 Part 1: The Tools of Strategic Analysis overlaps—they both sell burgers, soft drinks, salads, chicken, desserts, and so forth—although many consumers believe that the quality of food is superior in the casual dining restaurants. In addition to any perceived differences in the food, however, the level of service in the two kinds of establishments varies significantly. At fast-food restaurants, food is handed to consumers on a tray; in casual dining restaurants, wait staff actually bring food to consumers on a plate. This level of service is one reason that casual dining is growing in popularity. 51 Process Innovation A firm’s processes are the activities it engages in to design, produce, and sell its products or services. Process innovation, then, is a firm’s effort to refine and improve its current processes. Several authors have studied the relationship between process innovation, product innovation, and the maturity of an industry. 52 This work, summarized in Figure 2.5, suggests that, in the early stages of industry development, product innovation is very important. However, over time product innovation becomes less important, and process innovations designed to reduce manufacturing costs, increase product quality, and streamline management become more important. In mature industries, firms can often gain an advantage by manufacturing the same product as competitors, but at a lower cost. Alternatively, firms can manufacture a product that is perceived to be of higher quality and do so at a competitive cost. Process innovations facilitate both the reduction of costs and the increase in quality. The role of process innovation in more mature industries is perhaps best exemplified by the improvement in quality in U.S. automobiles. In the 1980s, Japanese firms such as Nissan, Toyota, and Honda sold cars that were of significantly higher quality than those produced by U.S. firms General Motors, Ford, and Chrysler. In the face of that competitive disadvantage, the U.S. firms engaged in numerous process reforms to improve the quality of their cars. In the 1980s, U.S. manufacturers were cited for car body panels that did not fit well, bumpers that were hung crookedly on cars, and the wrong engines being placed in cars. Today, the differences in quality between newly manufactured U.S. and Japanese automobiles are very small. Indeed, one well-known judge of initial manufacturing quality—J. D. Powers—now focuses on items such as the quality of a car’s cup Figure 2.5 Process and Product Innovation and Industry Structure High Source: Taken from Hayes and Wheelwright, “The dynamics of process-product life cycles.” Harvard Business Review, March–April, pp. 127–136. Importance of Type of Innovation Product Innovation Process Innovation Low Emerging Industry Industry Structure Mature Industry
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